According to new survey data from the Federal Reserve’s 2023 Survey of Household Economics and Decisionmaking (SHED), low-income families are more likely to reduce work to care for young children, while high-income families are more likely to pay for care. These differing decisions have financial consequences, as families who reduce work are less well off financially than those who do not. Although families who pay for care are better off overall, child care costs remain a notable expense. On average, families who pay for care spend about half as much on that care as they do on housing each month. This analysis suggests how government and private sector support for child care might vary by income.
Families handle care responsibilities differently across income levels. As shown in Figure 1, households with young children earning less than $75,000 per year are more likely to provide care themselves, with about 35 percent of these households reducing work to care for children. As income rises, the share of households using paid child care increases—from 17 percent for those making less than $24,000 to 41 percent for those making more than $150,000. The highest earners are unlikely to reduce work to care for children, with only about 14 percent of households doing so.
The SHED data cannot determine whether these differences in care arrangements arise from preference or necessity. It may be that some parents choose not to work because of the cost of child care, especially for multiple children. Alternatively, it may be that some parents choose not to work or work fewer hours because they want to stay home with children despite lost income. However, the SHED does show that there are financial costs for families who reduce work to take care of children.
As shown in Table 1, households where parents have reduced work to care for children fare worse on a range of financial measures; less than half report they could cover an unexpected $400 expense with cash or that they are doing “at least okay” financially. Only 30 percent saved any money in the previous month. Meanwhile, parents who paid for care and those who did not pay for care or reduce work (likely using free public or family care) were more likely to cover expenses, report doing well financially, or save money. Overall, only 64 percent of work-reducing households responded positively to any of the three measures compared to 80 percent of those paying for care and 77 percent of those with free care.
Academic literature provides additional insight into the preference-necessity debate. A body of work suggests access to affordable care increases parental labor supply, implying that some parents want to work but cannot due to lack of available or affordable care (Morrisey 2017). Together, academic evidence and the SHED suggest that helping families access affordable child care could increase the supply of workers and reduce negative financial consequences associated with paying for care.
Although families who pay for child care are generally wealthier and in better financial circumstances, child care remains a significant financial burden. OUSEA analysis indicates that the median individual with a child under 13 who pays for child care spends $1,700 per month on rent or mortgage and $867 on child care—51 percent of monthly housing costs on average.
Government and private sector support for high-quality child care could enhance financial well-being, labor supply, and economic growth. The analysis shows many low-income families reduce work when they have children at the cost of their financial well-being. Even families able to pay often find child-care costs prohibitively expensive.
Stronger government and private-sector support could alleviate these difficulties by providing high-quality yet profitable childcare options—a challenge given almost three-quarters of families live in areas undersupplied with such services. Many countries address this issue through government investment; however, U.S. government spending on childcare is among the lowest within the Organisation for Economic Co-operation and Development (OECD).
Investment is crucial not only for families but also businesses and the macroeconomy. Childcare benefits help attract and retain top talent while decreasing absenteeism among existing workers (Kos et al., 2024). Reducing barriers allows better allocation of talent increasing productivity and economic growth (Hsieh et al., 2019; Buckman et al., 2021). While various factors like parental preference impact decisions around paid childcare usage beyond survey data capture capacity—the consensus remains: American family childcare costs are high.
